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Edited Transcript of ITRI earnings conference call or presentation 14-May-18 9:00pm GMT

Q1 2018 Itron Inc Earnings Call

LIBERTY LAKE May 22, 2018 (Thomson StreetEvents) -- Edited Transcript of Itron Inc earnings conference call or presentation Monday, May 14, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Barbara J. Doyle

Itron, Inc. - VP of IR

* Joan S. Hooper

Itron, Inc. - Senior VP & CFO

* Philip C. Mezey

Itron, Inc. - President, CEO & Director

* Thomas L. Deitrich

Itron, Inc. - Executive VP & COO

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Conference Call Participants

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* Chip Moore

Canaccord Genuity Limited, Research Division - Senior Associate

* Joseph Amil Osha

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Noah Duke Kaye

Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

* Sean Kilian Flanagan Hannan

Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components

* Sophie Ksenia Karp

Guggenheim Securities, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Itron, Inc. Q1 2018 Earnings Call. Today's call is being recorded.

For opening remarks, I would now like to turn the call over to Ms. Barbara Doyle. Please go ahead.

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Barbara J. Doyle, Itron, Inc. - VP of IR [2]

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Thank you, Stephanie. Good afternoon, and welcome, everyone, to Itron's First Quarter 2018 Earnings Conference Call.

We issued a press release earlier today announcing our results. The press release includes replay information for today's call. A presentation to accompany our remarks on this call is also available through the webcast and on our corporate website under the Investor Relations tab. This evening, we also plan on filing our Form 10-Q for the quarter ended March 31, 2018. The filing will be available on the SEC and company websites tomorrow, May 15.

As a reminder, Itron completed the transaction to acquire Silver Spring Networks on January 5, 2018. This is the first quarter that includes results from the Silver Spring Networks acquisition, which is reported at Itron's Network segment.

On the call today, we have Philip Mezey, Itron President and Chief Executive Officer; Joan Hooper, Senior Vice President and Chief Financial Officer; and Tom Deitrich, Executive Vice President and Chief Operating Officer. Following our prepared remarks, we will open up the call to take questions using the process that the operator will describe.

Before I turn the call over to Philip, let me please remind you of our non-GAAP financial presentation and our safe harbor statement.

Our earnings release and financial presentation include non-GAAP financial information that we believe enhances the overall understanding of our current and future performance. Reconciliations of differences between GAAP and non-GAAP financial measures are available in our earnings release and on our Investor Relations website.

We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these expectations because of factors discussed in today's earnings release and the comments made during this conference call and in the Risk Factors section of our Form 10-K, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements.

Now please turn to Page 4 in the presentation, and I will turn the call over to our CEO, Philip Mezey.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [3]

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Thank you, Barbara.

We had a very full quarter since closing the Silver Spring Networks transaction in January. I've spent a great deal of time with customers discussing their business challenges and our focus on innovation to help them reliably deliver critical infrastructure services. The response to our strategy continues to be very positive, and we are maintaining clear momentum in the industry.

In the first quarter, we delivered strong revenue performance, continued to execute on our operational transformation, and began to integrate the new Networks business.

Revenues of $607 million increased by 27% compared with last year, including our new Networks segment. Revenues increased by 9%, excluding Networks. This revenue reflects strong customer interest, good sales execution and a robust backlog.

Non-GAAP EPS of $0.13 was slightly above the midpoint of the guidance range we provided. Q1 gross margin was a bit lower than we expected due to elevated costs related to factory and supply chain transitions, product mix and higher cost of materials.

As has been widely reported, rising end market demand is leading to tight supply and price increases, mainly in electronic components. We're actively working with our global manufacturing partners to isolate risk areas and develop plans to address these industry-wide challenges.

Relationships we've established with contract manufacturing partners helps strengthen our ability to navigate through cyclicality in the electronics industry. We continue to see opportunity for higher margins in the second half of the year as we realize greater efficiency from our global supply chain transformation and restructuring projects. These actions, already underway, will help mitigate headwinds and materials' prices.

In terms of bookings and backlog, customer activity continues to be very healthy. Total backlog at the end of the quarter was $3.1 billion, including $1.4 billion of acquired Networks backlog. The Networks backlog includes $13 million total endpoints to be deployed, in addition to the $29 million cumulative endpoints delivered through the first quarter of 2018.

Our robust backlog reflects strong new industry demand for new technologies and an expanding group of Itron network adopters across electricity, gas and water utilities and municipalities.

Total bookings of $557 million resulted in a book-to-bill of 0.92:1. This was in line with our expectations given typical seasonality of the business and strong bookings in the fourth quarter. We have several notable deals across the business that highlight our momentum.

In the Electricity segment, we booked annual orders for the multiyear PLN contract in Indonesia and the [Unidas] contract in France. We are also very pleased that Itron's OpenWay Riva solution has been selected by a consortium of utilities, including several Emera subsidiaries, for their grid modernization and customer engagement initiatives. These deployments will total more than $1.8 million endpoints over the next 3 to 5 years, commencing after contracts are completed and all approvals are obtained.

Emera's Tampa Electric has already field-tested the OpenWay Riva solution, including certain distributed intelligence capabilities, and we look forward to partnering with the entire consortium on this very exciting mass rollout program.

We had very positive customer activity in the Distributed Energy Management segment. We signed a 5-year contract with Public Service Company of New Mexico to manage 60 megawatts of demand response capacity for residential and small commercial customers. We also booked a 3-year agreement with Northwest Iowa Power Cooperative, to implement our IntelliSOURCE software, providing technology to upgrade the utilities' demand response program.

In addition, Itron was selected for a San Diego Gas and Electric Project to manage distributed energy resources. The program includes multiple Itron solutions, which highlights the successful integration of the Comverge business into Itron.

In the Networks segment, we are very pleased to announce a new booking with Jamaica Power Public Service Company (sic) [Jamaica Public Service Company] to unify 670,000 electric meters under Itron's smart grid network. This project will build on the utility's previous deployments with Itron, which included 51,000 electric meters deployed in 2016 and '17, and the rollout of 37,000 smart streetlights in 2017. Jamaica's nationwide smart grid deployment will extend the utility's smart meter automation benefits and enhance post-storm restorations. The utility will manage the system through Itron's cloud-based SaaS solution.

We also secured a 7-year contract renewal with Florida Power & Light Company. The renewal covers managed services for its Itron smart grid network, connecting 4.9 million electric meters, distribution automation services, covering more than 27,000 DA devices, and management for more than 500,000 streetlights. FPL will also upgrade to new Gen5 network hardware access points and network interface cards for streetlights.

Itron's very proud to provide the foundation for FPL's smart grid technology that delivered tangible benefits during Hurricane Irma in September of 2017. More than 500,000 outages were prevented during the hurricane. Service was restored to 1 million customers before the storm exited Florida, and service was restored to most of the remaining territory the next day.

Today, we also announced a new agreement with Mississippi Power, a subsidiary of Southern Company, to deploy and connect, under Itron's network, nearly 200,000 smart meters across Southern Mississippi. Itron will also provide managed services under a 5-year contract to aid in the utility's operational and customer engagement transformation efforts.

In the Gas segment, we booked multiple contracts, including a significant new Riva project with NorthWestern Energy, to modernize its gas and electric systems in South Dakota and Nebraska. And notable contracts with Enexis and Hermann Pipersberg in EMEA.

In water, we also secured numerous contracts, including Aqua America and Mountain States in the U.S. and with Veolia, ista and Suez in EMEA.

Now let me turn the call over to Joan to review our financials.

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [4]

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Thank you, Philip.

On our last earnings call, we deviated from our normal practice and provided Q1 financial guidance. We did this due to the unique circumstances of closing the Silver Spring Networks acquisition and the anticipated elevated cost associated with our supply chain transitions.

In the first quarter, we delivered business results within or slightly above the ranges we provided. A summary of consolidated GAAP results are shown on Slide 6, and non-GAAP results are shown on Slide 7.

Revenues of $607 million increased 27% versus last year, and were slightly above our guidance range of $575 million to $600 million. Q1 gross margin of 29.6% was down from 33% last year, driven by incremental costs associated with manufacturing transitions, increased component and commodity costs and product mix. There was also a negative 70 basis point impact to the purchase price accounting related to the acquisition of Silver Spring Networks.

Regarding the industry-wide cost pressure Philip mentioned, higher prices on electronic components impacted our gross margin a bit more than commodities this quarter. We expect the industry supply and pricing issues will persist, creating more headwinds in the second quarter and throughout the rest of the year. This will push some of the margin benefits we were anticipating in the second quarter until later in the year.

First quarter GAAP net loss of $3.74 per share was driven by $88 million of charges related to the 2018 restructuring plan that we announced last quarter and $63 million of acquisition and integration-related expenses for Silver Spring Networks.

As we indicated on last quarter's call, the 2018 restructuring plan is expected to drive $45 million to $50 million of annualized savings by the end of 2020. We also expect to realize an additional $50 million of annualized synergies from the Silver Spring Networks acquisition also by the end of 2020.

Regarding non-GAAP metrics. Adjusted EBITDA of $40 million or 6.5% of revenue, was down 300 basis points year-over-year, driven by lower gross margins and added expenses for acquired operations. Non-GAAP EPS of $0.13 was within our $0.10 to $0.15 guidance range.

Cash and equivalents at the end of the first quarter totaled $144 million, down from $176 million net of restricted cash at year-end 2017.

Total debt of $1.1 billion includes the financing for the acquisition at a blended interest rate of approximately 4%. Net leverage was 4.4x trailing 12-month adjusted EBITDA. Our focus remains on delevering to about 2x adjusted EBITDA in approximately 2 years.

In terms of cash flow in the quarter, we had a net use of cash from operations of $24 million and negative free cash flow of $42 million. As we discussed on last quarter's call, we anticipated negative cash flow in the first quarter due to the cash outlays for acquisition-related expenses as well as the timing of working capital.

Now turning to the first quarter revenue year-over-year bridge on Slide 8. Total company revenue grew by 27% or 21% on a constant currency basis, with growth across Electricity, Gas and Water and strong performance from the new networks segment. Electricity revenue grew 2% in constant currency due to higher managed services revenue, product revenue growth in EMEA, and strong OpenWay Riva demand in North America.

Linky deliveries almost doubled year-over-year in France, and Riva deployment continued to ramp in the Americas. Gas delivered revenue growth of 6% in constant currency, driven by higher smart solution revenues in EMEA, namely on the gas-fired project in France, increased OpenWay Riva sales in the U.S. and strong residential demand in Latin America.

Water revenue increased by 4% in constant currency. Growth was driven by an increase in Riva deployments in North America and Australia. In addition, demand continues to increase in Latin America, driven by increased funding for residential water projects throughout the region.

Revenue for the Networks segment, which is the acquired Silver Spring Networks business, was $86 million in the quarter driven by strong North American network solution and managed services. First quarter revenue reflected a record billings quarter that was better than we forecasted, driven by the timing of customer deployments, some of which carried over from 2017 as well as some of which we had expected to occur in the second and third quarters of 2018.

The non-GAAP EPS year-over-year bridge is on Slide 9. Strong volume and revenue performance drove higher gross profit in the quarter. Non-GAAP operating expenses increased due to the addition of departmental expenses for the acquired businesses.

Excluding the acquisitions, OpEx declined by $5 million year-over-year.

Increased net interest and other expense lowered EPS by $0.15 year-over-year, driven by the interest on the incremental debt used to fund the acquisition.

The tax rate on the non-GAAP income in the quarter negatively impacted EPS by $0.12 compared with last year. The effective tax rate in each quarter will vary from the annual guidance we provided, based on the timing and mix of income by jurisdiction as well as discrete tax items.

We still expect the non-GAAP full year tax rate to be approximately 28%. The net result was a non-GAAP EPS of $0.13 compared with $0.57 in the prior year.

Slides 10 through 13 show results by business segment for the first quarter.

Itron's Electricity business delivered another strong quarter, with revenue of $252 million, gross margin of 27.7% and non-GAAP operating margin of approximately 8%.

Gas gross margin of 31.6% and non-GAAP operating margin of 11.9% were both down compared with last year, driven by a higher mix of meters versus communication modules, a higher mix of European business and elevated costs associated with manufacturing transitions.

Gross margin in the Water segment was 28.8%, and non-GAAP operating margin was 4.5%. Margins were negatively impacted by product mix, increased commodity prices and additional overhead costs during factory transitions. In addition, we are investing in implementation services for the growing backlog of new Riva projects. We expect Water's operating margin percent will increase in Q2 and beyond.

The Networks segment gross margin was 33%, and non-GAAP operating margin was about breakeven. Gross margin included a negative 500 basis-point purchase price accounting impact and otherwise reflected a high level of endpoint deliveries and good business mix. The acquisition was accretive to Itron's overall gross margin in the quarter by approximately 60 basis points.

Revenue and gross margin for the Networks business will vary quarter-to-quarter based on project schedules and product mix. We do not expect the same level of revenue or margin performance in the second quarter given the overachievement in the first quarter. As we previously discussed, we continue to anticipate the transaction will be dilutive to adjusted EBITDA and non-GAAP EPS in 2018, turning accretive in 2019.

Overall, the integration of the business is progressing well, and we're very pleased with the Networks segment's contribution to Itron's overall results.

With that, I'll turn the call back to Philip.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [5]

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Thank you, Joan.

Overall, we were pleased with our performance in the first quarter. New solutions drove revenue growth in our Electric, Gas and Water businesses, and the new Networks segment delivered strong performance. We continued to see traction in our Smart Cities services, including the deals we discussed today for Distributed Energy Management, distribution automation and smart streetlights. Our $3.1 billion total backlog has nearly doubled compared with the first quarter of 2017, and our pipeline of new opportunities is increasing.

Operationally, we're making our business stronger and more efficient. In the last few quarters, we have discussed projects to significantly transform our operations, and plans to drive sizable synergies from our acquisitions. We are on track with these efforts that will increase our margin and earnings in the second half of 2018 and beyond.

Organizationally, I'm very pleased with the collaboration across the company and the pace of our integration. There's a strong sense of optimism and a clear shared mission. Our portfolio of smart utility and smart city solutions, utility data and network expertise and talented employees, uniquely positions Itron to accelerate innovation, value and choice for customers.

We're excited by the high level of interest in Itron's IoT network platforms from our customers and the industry, and we are very encouraged about the opportunity for revenue growth, margin and earnings improvements across our business.

Operator, now let's open up the call and take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Chip Moore with Canaccord.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [2]

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Maybe you could talk a little bit more about the impact of the component shortages and the commodity inflation -- impact by segment? And then does that change your thoughts at all, exiting the year, on sort of that mid-teens EBITDA goal?

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [3]

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I'll start out with the exit question, and then hand over to Tom Deitrich to talk about the particulars. We still see the opportunity to exit the year at that mid-teens EBITDA level. So our current plans are focused on mitigating some of these headwinds that we talked about on the call, with the expectation that we can still get to those sorts of levels. And with that, I'll hand it over to Tom on the more detailed question.

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [4]

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Sure. Thanks, Chip. What I would say is it's been widely talked about in the industry. There's been a lot of growth in the electronic sector. It's putting pressure on the supply chain for some unusual places in terms of supply. It's been passive. It just has been really tough to come by. So resistors, inductors, capacitors, things of that sort have been short, and they've been in allocation mode in the supply base for a little while now. That certainly has caused some increased costs on our side as well as the supply chain transitions that we've been working our way through. The good news in this, though, is a lot of activity going on, on our side around alternative sourcing, long-term supply agreements, working with contract manufacturers to really end up securing supply. The headwinds that you saw in Q1 certainly continue on I think a little bit into Q2. But a lot of the actions that we're taking now really help bring up the performance as we move throughout the year.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [5]

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And maybe just a follow up on bookings. I think you called out -- seasonality, obviously, last quarter was very strong. If you take into account, I guess, some of the Silver Spring business, the timing of those deployments, how are you thinking about bookings and I guess the business [on the com] there?

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [6]

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Well, Chip, I'd say that we're sticking with our goal of more than -- replenishing the consumed backlog during the course of the year, that is to aim at 1:1 or better for the year as a whole. And we expect some variability in the course of the quarters, as you've seen in our historical performance.

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [7]

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A very healthy pipeline network.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [8]

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Yes. Certainly that. I mean and we're, of course, very pleased by the uptick in overall coverage of not only the total backlog number, but you'll also see that the 12-months' backlog is up very considerably as well.

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Operator [9]

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We'll move on to Noah Kaye with Oppenheimer & Company.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [10]

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Philip, obviously, in addition to the core business or the base -- the organic business, which did have nice growth this quarter, you digested a big one here with Silver Spring. This question may be a little bit in the weeds, and feel free to pull back and talk about some of the rev-rec issues. But you reported a $337 million 12-month backlog for Silver Spring, and that, frankly, seems a little bit better than what we would have expected. I think on a billings basis, at least, historically, Silver Spring had a pretty healthy book and ship business. So can you comment to whether or not there's some catch-up here on that deferred Silver Spring revenue? Or is the business just stronger than we all thought? And what kind of book-and-ship business would you expect Networks to do in addition to that 12-month backlog?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [11]

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Yes. I mean, I'll make a comment on your question around, is there some sort of catch-up period, the answer would be no. So we obviously implemented the new revenue standard this quarter, and are reporting a backlog for the Networks segment that's embedded in our total numbers, is totally consistent from a methodology standpoint. So we did have to think up the methodologies to ensure that we didn't have any contracts in here that didn't have regulatory approval. But from an accounting standpoint, there's no difference in the $337 million that we brought in for the 12 months, and the $1.4 billion was essentially what they brought with them.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [12]

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And Noah, I would say that, that's also -- yes. I mean, sorry, strong bookings performance in the Q3, Q4 and even Q1 time frame. I mean -- so the bookings performance in the Networks segment is coming along well. Generally -- so book and ship, a very modest amount. The business is really primarily project-driven and has a low component of book and ship.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [13]

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Okay. And then if I could circle back on the margins maybe to put a little bit of a finer point on it, what was the actual headwind from higher commodities direct in the quarter? And then how do you think about measuring the headwind? What was the headwind from the higher components' costs?

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [14]

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Yes. We didn't really break that out. What you saw in the financial performance was a combination of factors. Certainly, we had a little bit of our own supply chain transition. We had some acquisition-related factors, some inventory step-up. But the normal things that you would see in the first quarter after an acquisition as well as the component pricing and the effect on utilization of factories stopping and starting. So all of those factors are built into the financial results that you saw in Q1. As we work to establish long-term supply arrangements so that we've got the components coming in on a regular basis, we end up seeing the benefits of our restructuring from the 2016 plan and so forth. We definitely believe we can even that out, but it was clearly something that affected us in Q1.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [15]

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And I would point out that in terms of commodity pricing, Noah. I mean, the largest impact is in our Water business. Although we do have a fair number of composites in our Water business, and there is some steel and aluminum in the gas business. But that really is primarily an issue within an element of our Water business, the straight out commodity fluctuation.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [16]

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Great. And then, obviously, you were able to overcome a little bit of those margin headwinds in the quarter just in terms of where the bottom line ended up. So as we look out to the rest of the year, how are you thinking about kind of the prior guidance, any bias there? Still confident, or do you anticipate some of these headwinds to maybe pressure that?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [17]

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Well, our normal practice would be to update the guidance on the Q2 call, and we do intend to do that as well. We gave a little bit of color around the impact of Q2 versus the rest of the year, essentially just a little bit more pronounced than what we had said on last quarter's call. So we had already provided quite a bit of color that the second half of the year profitably would be quite a bit higher than the second -- than the first half. And so, again, we gave a little color on that, no intent to really update guidance until the middle of the year.

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Operator [18]

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Joseph Osha with JMP Securities.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [19]

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Yet another gross margin question, I'm sorry. I recall that we had talked a little more specifically about under-absorption charges as you all kept some production in-house Q1 to deal with some of the issues you were dealing with. Can we expect at least that component of the headwinds to roll off in Q2? And how much of an overall impact would that be?

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [20]

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Yes. Good question, Joe. Tom here. The 2016 restructuring plan really had 3 factories -- or 3 pieces of business that we were looping around. We really are completing the -- all 3 of those during the first half of this year, and you start to see the benefits into the second half of the year. So a lot of the things that we had talked about last time, those tend to be timing-related, transients, and they kind of go away for us through the first half of the year. And this is what we said.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [21]

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Okay. And so then, after that, the idea would just be, we're having to guess at what input costs do. Obviously, that continues to be a headwind until it's not, right?

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [22]

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Yes. I wish I had the crystal ball as to exactly some of the -- when some of the supply allocation situations we see in the electronics, world will even out. You could read the blogosphere as well as I can to try to guess what it would look like. It usually takes several quarters for these things to work their way through the electronics' industry, but obviously, that's historical data rather than anything that's specific for this time. That's something we'll have to watch and see.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [23]

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Yes, it's always hard. And then 2 -- just 2 quick ones. First on the acquisition-related debt. [Q's]not out yet. There was a bridge loan initially. Has that been turned out or anything? Or what were the plans with that debt?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [24]

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Yes. I don't know specifically what you're referring to in terms of -- we had a loan -- we had a term loan structure or a bond structure, and we talked about that on the last call. And we're still essentially with that same structure. There's different pay-down timing of the term loan versus the bonds, but essentially, we're still on the same plan.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [25]

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All right. I must have missed that. I'm sorry. And then the last question is looking at that purchase accounting hit to the gross margins on Itron, how much of that is just this quarter? Or should we -- how should we think about that for the -- I'm sorry, the Silver Spring gross margins, how should we think about that going forward?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [26]

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Yes. That should just be a Q1 item. And that was 70 basis points on consolidated gross margin and 500 basis points on the Networks gross margin, that's all.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [27]

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Yes, so we can lift that whole 500 bps -- or we can drop, put that whole 500 basis points back onto the Networks gross margin for Q2, all other things being equal?

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [28]

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Well, again, we did try to provide a little bit of color, Q1 versus Q2 for Networks, because it was an exceptionally high quarter. They had some projects that had been expected to be recognized in Q4, and some that we expected in the second half of this year actually happened in Q1. So we try to provide a little color. We would not expect the same level of revenue and gross margin performance in Q2.

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Operator [29]

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Moving on to Sean Hannan with Needham & Company.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components [30]

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So I just wanted to see if I could follow up on a kind of a broader issue here or topic, more so a topic. As we've had, at least here, domestically, a lot of purse strings that are either opening or theoretically may still open, can you talk a little bit about any further indications for how tax reform could stimulate some more activity for you here in the states? Any color around that would be helpful.

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [31]

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Yes. Sean, it's actually kind of a mixed bag. I mean, a number of states have already -- and regulatory commissions have already intervened, demanding that the utilities return any benefits that they received from the tax legislation directly to the ratepayers. And there are a number of other jurisdictions in which there is some discussion about the possibility, as you're indicating, of using that benefit for infrastructure investment to make capital investments. So that -- how that is going to sort out is really still in development. But I would say that it applies only to a portion of U.S. jurisdictions, again, that have not already asked for a pay -- almost a complete pass-through of the benefits to the ratepayers.

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Sean Kilian Flanagan Hannan, Needham & Company, LLC, Research Division - Senior Analyst of Smart Grid, Electronic Mfg Svcs, IT Components & Electronic Components [32]

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Fair enough, that's helpful. And then in terms of some of the commentary you folks have provided, thinking about the Silver Spring opportunities and kind of this being able to be kind of an invested launchpad for you folks in getting more involved around various ancillary IoT technologies and thoughts for solutions moving forward. I just wanted to see if there's a potential to get some type of updated color now that you've got them under your wing for a period here. Any adjustments or more color to share around how you see that developing and the broader picture and time line for how that becomes a little bit more meaningful to the bigger Itron story here.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [33]

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Sure, Sean. I don't think you need to go very far here and talk about flying cars or trash collection because nearer to home, we are further along in our plans in order to certify Itron metering and end points underneath the Silver Spring Networks in order to create cross-selling opportunities there. We are very pleased with what we discovered in terms of the opportunities for distribution automation and street lighting and our ability to both cross-sell those back into the sort of legacy Itron environment. And then looking internationally at how we can use Itron's large -- legacy Itron's large geographic footprint in order to target the Silver Spring, the Gen5 network appropriately on a global basis, we have the solid makings here of how it is that we can drive the next level of business out of this acquisition. All of that being said, we are focusing on a standards-based compliant network with a large partner base in order to create an ecosystem of opportunities for many other partners and speaking at IoT World on Wednesday and we're going to be demonstrating other types of sensors and modules that are connected onto the network. And we see a longer-term developing opportunity there as well. But it's going to start out looking at meters and modules and cross-selling of DA and streetlights are the -- and software opportunities for the near-term benefits.

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Operator [34]

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Sophie Karp with Guggenheim Securities.

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Sophie Ksenia Karp, Guggenheim Securities, LLC, Research Division - Senior Analyst [35]

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A couple of questions, if I may. On the commodities' exposure, could you guys give us some more color on specifically which commodities is most significant driver of the costs for you, if any?

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [36]

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Yes. The biggest commodity movement that we've seen that -- it really has a material effect on our purchasing is brass. And so that's one. Steel and aluminum is much further down the list. It's not as big a factor. But trumping any commodity has been the things that are going on in the electronics industry, really the -- what's going on with allocation of supply in the -- the passive part of the electronics was probably the biggest cost factor, outweighing the others.

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Sophie Ksenia Karp, Guggenheim Securities, LLC, Research Division - Senior Analyst [37]

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Got it. So being that the steel is, like you said, further down the list on the value chain exposure, that the steel tariffs would probably not be a meaningful factor for you. Would it be fair to say?

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Thomas L. Deitrich, Itron, Inc. - Executive VP & COO [38]

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That -- again, it's really, really difficult to understand exactly what will happen. The news of the day tends to be difficult to predict exactly when those things could happen and what the tariffs would look like, but I would expect it to be pretty muted in terms of our impact on steel and aluminum.

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Sophie Ksenia Karp, Guggenheim Securities, LLC, Research Division - Senior Analyst [39]

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Got it. And then lastly, on the Networks segment and the -- sort of the revenue in that segment. As far as the end industry exposure of Networks segment, could you give us a little more detail on that? Is that -- I guess, I'm just sort of trying to understand whether it's driven mostly by industrial automation or Electric segment at the end of the day or any other segment that you have.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [40]

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So Sophie, it's -- the targeted customer base are largely investor-owned electric utilities. There are some municipal and locally-owned entities there. The exposure is predominantly in North America. Although there are a number of global opportunities. But this is a space that we're very focused on and familiar with, so almost entirely utility-oriented.

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Joan S. Hooper, Itron, Inc. - Senior VP & CFO [41]

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At least, municipalities.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [42]

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Yes -- businesses. Did I answer your question?

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Sophie Ksenia Karp, Guggenheim Securities, LLC, Research Division - Senior Analyst [43]

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Yes -- no, I think I got it.

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Operator [44]

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(Operator Instructions) We will move on to Pavel Molchanov with Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [45]

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Another one from me about kind of the cross-selling aspect of Silver Spring. In buying Silver Spring, you inherited a software platform that can be potentially deployed on top of your existing projects and deployments. And my question is, are you having conversations with legacy Itron metering customers on the Electricity side to add-on the software capabilities -- kind of the network management capabilities that Silver Spring brings to the table?

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [46]

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We -- I mean, there are opportunities. I think we're early there. I would say that legacy Itron customers did have reading and management requirements before, there are some select opportunities where we really see some exciting opportunities within the area of distribution automation and street lighting, as I said, to get back to the -- that legacy Itron side. But as you point out, there were also software opportunities. And I'd say that even on the legacy Itron side, the acquisition of Comverge and having a demand response is something -- capability is something that we're looking at as well.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [47]

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Okay. And you may or may not be willing to disclose this number, but Silver Spring's stand-alone historically disclosed managed services and SaaS as a revenue breakout. Is that something that you could share out of that $86 million of Silver Spring total?

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [48]

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No, we are not providing that breakout at this time.

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Operator [49]

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Noah Kaye with Oppenheimer & Company.

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Noah Duke Kaye, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [50]

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Philip, I wanted to talk -- to follow up on something you were talking about earlier in terms of -- let's call it the cross-selling platform. I really am thinking about the potential harmonization and the convergence of Riva and Gen5. I think in prior calls, you talked about kind of a planning process to be able to kind of harmonize those. And maybe that refines the go-to-market strategy a little bit over time. But it would be helpful for us just to understand where you're at in that process -- that sort of technology, planning and integration process? How long you see it playing out, and when do you think that starts to kind of influence your commercial strategy and what you're selling?

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [51]

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Sure. Noah, thank you. I would say that we are really on plan in terms of that planning process. Just to refresh everybody on the call both Networks provided by Itron and Silver Spring were radio frequency-meshing networks, using very similar types of technologies, even chipsets. So there is an announced support for a common standard so there is a real opportunity for the harmonization of these networks. Our teams have been working since the transaction closed on developing a plan. We expected that, that would take the first half of this year so that we would be in a better position to discuss the details in the second half. We also, when we reported the target of $50 million of cost synergies, talked about the fact that we expected that the R&D teams were the most heavily committed in terms of their existing road maps and contractual commitments, and so that we expected that it would take some time in order to be able to free up these teams to both -- to get to the synergy numbers but also to really drive -- execute on the convergence plans. So we expect that it's going to take some time to realize that convergence. Now that being said, what we've in the interim done is sorted out a very detailed go-to-market plan in which there is no ambiguity about what product is going to be used and what context and have discussed this with our customers and prospects, and so have a very targeted plan. And have also worked with our customers that we will not be in -- of course, in any way stranding any assets that are put out in the field, and that we provide a path to upgrade so that we are able to continue very effectively to sell both of these platforms.

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Operator [52]

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And there are no further questions in the queue. I'd now like to turn the call back over to Mr. Philip Mezey for his closing comments.

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Philip C. Mezey, Itron, Inc. - President, CEO & Director [53]

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Thank you, everyone. I just want to close with -- it was a very busy and productive quarter, and we're very pleased with the results of the -- of preliminary integration work we've done. Somebody made a comment about the -- that we have this under our belt or something like that. No, actually, this is an ongoing task that's going to take many quarters and a lot of vigilance to ensure that we do this properly. But the initial results are very, very positive. We're very pleased with the overall market response and our customers' response, which we think the backlog really reflects the opportunity, and the level of activity that we have in the market reflects a tremendous forward opportunity for us. The very aggressive plans that we have in order to continue to operationally improve and optimize the business give us the tools that we need to weather the kinds of pressures that have been discussed today here on the supply chain. So while we are recognizing the headwinds of -- and particularly component supply, we have very active plans under way in order to offset absolutely as much of that as we possibly can, so see a strong opportunity here for the remainder of 2018. Thank you all, and look forward to our call next quarter.

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Operator [54]

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There will be an audio replay of today's conference available this afternoon. You can access the audio replay by dialing 1 (888) 203-1112 or 1 (719) 457-0820 with the passcode of 7526899 or go to the company's website www.itron.com. This concludes today's call. You may now disconnect.